There’s been a lot of noise this week surrounding the imminent IPO of Brazilian neo-bank Nubank, whose parent company, Nu Holdings Ltd., filed its F-1 with the SEC on November 1st. Much of the hubbub has been around the downward revision of the proposed maximum offering price, from $11.00 USD to $9.00 USD per share, changing the expected valuation from just over $50B to roughly $41B. For market watchers, the downward revision seems consistent with the negative sentiment accompanying the general sell-off in equities that started the Friday after Thanksgiving. However, the causal chain between the slumping markets and the slashing of the IPO price is likely an oversimplification. In addition to bad timing, Nubank is also facing substantial headwinds from one, very high-profile precedent transaction, and a couple of bad market comps. But if one were to dig a little deeper into the Nubank IPO, they may just find that despite the headwinds, the Nubank IPO presents an opportunity for investors to avail themselves of a quality fintech offering.
One, very bad precedent transaction
The most recent, relevant transaction, and the one most likely raising concerns among fintech investors, is the massive IPO flop of India’s Paytm on November 18th. Notably, the largest public offering in India’s history, parent company One97’s Paytm shed 40% of its share price within its first week of trading. Though the offering was oversubscribed, analysts note that it wasn’t oversubscribed to the degree of other recent technology startup IPOs of the likes of Nykaa (e-commerce), Policybazzar (insurtech), and Zomato (e-commerce/food delivery). In searching for an explanation, Abhay Doshi, founder of pre-IPO and unlisted shares platform UnlistedArena.com had this to say, “Expensive valuations and continuous losses made investors wary. Road to profitability too looks challenging.” Put more simply, Paytm was priced too aggressively as a product of its growth rate and customer acquisition costs. Though Paytm’s core product offering is different from Nubank’s – functionally, Paytm’s platform is more analogous to Paypal/Venmo – it still falls into the market category of a financial technology company, and as such, makes Paytm a fair comp for a precedent transaction.
A couple of bad market comps
Nubank’s IPO is also experiencing a stiff headwind from a couple of bad market comps. One is from its Brazilian fintech brethren StoneCo Ltd. (NASDAQ: STNE). Though StoneCo is a fintech that services the merchant side – unlike Nubank whose core offering is consumer facing – the payments processor and lender to small and medium size Brazilian merchants is down almost 80% YTD at this writing; this accelerated by its poorly received earnings release coming just a few weeks ago on November 16th. Also, noteworthy (but, less so), StoneCo, like Nubank, is a Brazilian fintech backed by Warren Buffet’s Berkshire Hathaway Inc.
The other comp comes from privately held N26, the Berlin, Germany-based neobank which announced its withdrawal from the U.S. market in mid-November. Citing a desire to “sharpen its focus on its European business”, N26’s withdrawal constitutes a negative news catalyst for a high-profile, international neobank. That said, a closer examination of N26’s business model shows that its product and end-users are very different from those of Nubank’s. Whereas Nubank targets the non-banked and underbanked in South America, N26 was targeting traditional consumer banking customers in America, which unfortunately (and perhaps unwisely) positioned them to compete head-to-head with America’s largest consumer banking institutions, like Chase, Citi, and Wells Fargo, in their collective efforts towards digital transformation.
Investment bank take…
In thinking about Nubank’s IPO from a traditional perspective, using precedent transactions and market comps to determine viability and valuation, there are not a lot of positives to be found. Adding to the headwinds is really bad market timing, as the S&P 500 looks to be down close to 2.75% for the last 30-day frame, and the tech-heavy NASDAQ down almost 5% for the same period. Collectively, these factors are likely, and understandably, why the decision to revise the IPO pricing range downward was made.
But more scrutiny is warranted in Nubank’s case.
Precedent transactions and market comps, at best, represent ‘likenesses’ to the company and transaction being contemplated. Fortunately for Nubank (in my opinion), the degree of likeness to its peers is small enough that it’s worth taking a closer look at.
Is Nubank a Brazilian fintech? Yes.
Is Nubank an international neobank? Yes.
Is Nubank identical to Paytm, StoneCo, or N26? No.
To my mind, Nubank’s go-to-market strategy has been well thought out, and to date, well executed. Its core mission of providing low-cost financial services on a mobile platform dovetail perfectly with a massive TAM of non-banked and underbanked end-users in its core market of Latin America.
Nubank’s technology maps perfectly to its end-users’ needs, and its end-users represent a giant underserved community that is now gaining access to broader financial services and banking.
Paytm, N26, and StoneCo all entered existing, highly competitive markets, where growth comes at a higher CAC and less margin.
And as to the IPO itself, take a look at the matrix below which compares a couple of relevant metrics with Paytm’s.
Nubank v. Paytm metrics at time of IPO
|EV/Revenue ( at IPO)||43.87x||31.88x|
|Annualized Rev. Growth (2 fiscal years leading into IPO)||(5.65%)||52.03%|
Though a couple of data points don’t make for a comprehensive analyst conclusion, they are indicative of a positive, relative value story in the face of Nubank’s IPO headwinds. This suggests that Nubank’s fintech investment bankers’ decision to revise the IPO price downward may bode well for the outcome of the offering, and the investors who buy-in.